Pockets of Pessimism

The stock market is susceptible to a correction but there is probably still too much pessimism on Wall & Main for it to yet succumb to a Bear market.

Currently, there is plenty of enthusiasm on Wall Street. The S&P 500 established its 107^th record high close of the year on Friday and has now set a record high on 45% of its trading days this year! The S&P 500 has provided a total return so far this year just shy of 30% after generating a total return last year of 26%! This year, 7 of its 11 sectors have gifted investors with 20%+ total returns and 9 sectors have generated 10% or higher returns.

According to Bloomberg, assets in leveraged long ETFs exceed inverse products by a record almost 12 times. The CBOE stock market volatility index which measures expected volatility of the S&P 500 closed at 12.77, lower than 84% of the time since 1990. According to research from Seth Golden, 2024 represents just the third time in the last 29 years when the forward EPS and forward PE ratio for the S&P 500 index “both” increased by double-digit amounts in a calendar year. A recent Bank of America global fund manager survey showed that U.S. equity positioning surged to an 11-year high. Investor surveys reflect this positioning as most now are showing much more bullishness. The Investor Intelligence Bull/Bear Ratio just surged close to 4.0 – a very high bullish reading by historical standards. Similarly, the AAII US Investor Sentiment Survey suggest Bulls are close to 50%, near its higher readings.

Imminent recession fears have also noticeably faded both since the Fed finally began easing and since the Presidential election. The TIPP Economic Optimism Index just rose above 50% (an optimistic reading) to its highest level since 2021. Finally, the earnings yield on the S&P 500 Index compared to the 10-year Treasury Bond Yield recently declined to its lowest level in 22 years.

From a contrarian standpoint, these numerous indications of burgeoning optimism among investors probably suggest the stock market is headed soon for a correction. It certainly would not be surprising. Corrections are part of every Bull market, and the S&P 500 Index has not had one now for over a year in October 2023. Although widespread contemporary optimism among investors is certainly a warning sign near term for stocks, there are still considerable pockets of pessimism evident across both Wall Street and Main Street. Consequently, a pending correction notwithstanding – the current Bull Market seems likely to again persevere during 2025.